The ‘patent box’ proposal announced as part of the 2021-22 Federal Budget seeks to encourage investment in Australian-developed medical and biotech advances, complementing the Federal Government’s primary focus on tech innovation in its Digital Economy Strategy.
The government has yet to iron out the details of the new regime, but the following is clear from the Budget papers:
- From income years starting on or after 1 July 2022, income derived from Australian medical and biotech patents for inventions developed in Australia will be taxed at 17% (instead of the usual 30% corporate tax rate or 25% for certain SMEs).
- To be eligible for the reduced tax rates, patent applications must be made after the Budget announcement and granted at the time the income is generated.
- The reduced tax rate will only be available for the proportion of income directly attributable to the patent and development activities that occurred in Australia. That is, income attributable to other activities (such as branding) or any development that occurred in other jurisdictions is unlikely to benefit from the lower rate.
The government will consult industry and follow the Organisation for Economic Cooperation and Development (OECD) guidelines to ensure the tax rate and its eligibility criteria align with internationally accepted standards.
Four key details to watch
It will be interesting to see how certain details are addressed, such as:
- How the patent box will apply to income derived from a number of different entities. By imposing development conditions, the regime encourages moving research and development activity to Australian shores rather than simply assigning patents to Australian entities. It is also likely that companies conducting the relevant research and development activity will need to both generate the income and hold the related patent to qualify (in line with OECD BEPS Action 5: Agreement on Modified Nexus Approach for IP Regimes). Currently, this is not necessarily a practical reality for companies and it will be interesting to see whether the regime will account for this.
- Whether the reduced tax rate will be applied to income derived from any patent. For example, will the regime focus on the development and patenting of pharmaceutical substances/compounds or will the reduced tax rate extend to income derived from patents claiming incremental developments to these substances? Most patent box regimes do not discriminate against the qualifying patent subject matter and it seems that, aside from the industry-specific limitation, the Australian government will adopt a similar approach.
- The consequences of an invalidity ruling. Given that an invalidity ruling revokes a patent with retrospective effect, it will be interesting to see whether companies that have benefitted from the patent box for a later invalidated patent will be required to pay back this benefit. In the UK for instance, there is no claw-back of past taxed income once a patent is invalidated – the only consequence is that the company will not benefit from the patent box for income derived from that invalidated patent going forward. While this approach provides for simpler enforcement and greater certainty, it may encourage the filing of borderline-valid, low-quality patents, running counter to the investment in research and development the government seeks to support.
- Whether the qualifying industries and intellectual property rights will be expanded. The government has indicated that it will consider extending patent box incentives to the clean energy sector and we have yet to see if the patent box will benefit other industries or intellectual property rights in future. In the Netherlands for instance, patent box benefits (referred to as ‘innovation box’) apply to rights such as patents (pending or granted), plant breeders’ rights (pending or granted), and certain R&D and software that has not been patented. This applies across all industries and in fact, most patent box regimes are not industry-specific.
While we await the relevant details, there is no doubt that exciting times lie ahead for Australian research and development in the life sciences sector. We look forward to the next development to join the likes of Gardasil and the Cochlear implant in the Australian R&D hall of fame.
This article was originally co-authored by Kate Hay
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